Two US companies and two Brazilian companies (Claimants/Purchasers, also collectively referred to in the singular), entered into an agreement (SPA) with two Brazilian companies and a German company (Respondents) for the purchase of shares in a Brazilian company (X) held by Respondents. The agreement was governed by New York State law. Claimants accused Respondents of, amongst other things, intentional breaches of representations and warranties made in the share purchase agreement. In particular, they argued that the target company's financial statements were not in conformity with Brazilian GAAP and did not present fairly the company's financial position, liabilities and results of operations. Respondent 1 counterclaimed for the earn-out component of the purchase price. An amount of 7 million dollars had previously been paid by Claimants as an advance on future earn-out payments. The parties disagreed over the exchange rate to be applied to this advance when calculating the earn-out due, which was payable in Brazilian reais. Claimants argued for the application of the rate that was in effect on the day before they actually paid the advance at the closing, while Respondents argued for the exchange rate in effect on the day before Claimant first paid part of the earn-out, which was two years later.

Deux sociétés américaines et deux sociétés brésiliennes (les demandeurs/acheteurs, également désignés collectivement au singulier) avaient conclu une convention de cession d'actions («SPA») avec deux sociétés brésiliennes et une société allemande (les défendeurs) en vue de l'achat d'actions d'une société brésilienne (X) détenue par les défendeurs. La convention était régie par la loi de l'État de New York. Les demandeurs accusaient entre autres les défendeurs de violation intentionnelle des déclarations et garanties de la convention. Ils soutenaient notamment que les états financiers de la société cible n'étaient pas conformes aux principes comptables généralement acceptés au Brésil et ne représentaient pas fidèlement sa situation financière, son passif et son résultat d'exploitation. Le défendeur 1 réclamait pour sa part la partie du prix d'achat couverte par la clause d'earn-out. Un montant de 7 millions de dollars avait précédemment été versé par les demandeurs à titre d'avance sur les futurs paiements d'earn-out. Les parties étaient en désaccord sur le taux de change applicable à cette avance lors du calcul des earn-out dus, qui étaient payables en réaux brésiliens. Les demandeurs plaidaient pour l'application du taux de change en vigueur la veille du jour où ils avaient effectivement payé l'avance à la réalisation, les défendeurs pour celui en vigueur la veille du jour où ils avaient payé la première partie des earn-out, deux ans plus tard.

Dos empresas estadounidenses y dos empresas brasileñas (demandantes/compradores, también denominados colectivamente en singular) celebraron un acuerdo de adquisición de acciones («SPA») con dos empresas brasileñas y una empresa alemana (demandados) para comprar acciones en una empresa brasileña (X) perteneciente a los demandados. El acuerdo estaba gobernado por la ley del Estado de Nueva York. Los demandantes acusaron a los demandados de, entre otras cosas, haber infringido deliberadamente las declaraciones y garantías estipuladas en el acuerdo de adquisición de acciones. En particular, estos alegaron que los estados financieros de la empresa objetivo no eran conformes a los principios contables generalmente aceptados en Brasil y que los mismos no presentaban fielmente la situación financiera, las deudas y los resultados de las operaciones de la empresa. El demandado 1 presentó una demanda reconvencional por el componente del precio de venta relativo a los beneficios futuros. Previamente, los demandantes habían pagado la suma de 7 millones de dólares como anticipo de los próximos pagos por beneficios futuros. Las partes estaban en desacuerdo sobre el tipo de cambio que debía aplicarse a este anticipo al calcular el pago por beneficios futuros debido, que tenía que realizarse en reales brasileños. Mientras los demandantes solicitaron la aplicación del tipo de cambio en vigor el día anterior a la fecha de pago efectivo del anticipo en el cierre, los demandados defendieron la aplicación del tipo de cambio en vigor el día anterior a la fecha del primer pago del demandante de una parte del beneficio futuro, que tuvo lugar dos años más tarde.

'V. Factual background

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C. Key SPA provisions

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2. Representations, warranties, covenants and agreements

81. Articles III, IV and V of the SPA contain extensive representations, warranties, covenants and agreements of [Claimant] as Purchaser of [Company X] and the Selling Shareholders. Article III contains over 20 categories of separate (not joint) "representations and warranties" made by [Respondents] to [Claimant], for example, that [Company X]'s Financial Statements and Disclosure Letter are accurate, complete and not misleading. Article VI contains "additional covenants and agreements" of the Selling Shareholders, including, in § 6.14, commitments to cause [a spin-off of Company X] "to perform all of its obligations and pay all of its debts and liabilities in accordance with their terms, subject to the limitations contained in Article IX (including the cap in Section 9.11(b))".

3. Indemnification for breach

82. Article IX of the SPA deals with indemnification obligations in the event of breach of representations, warranties, covenants and agreements. As set out more fully below in addressing specific claims, certain of the indemnification provisions in Article IX apply both to breaches of representations and warranties and to breaches of covenants and agreements, while others apply only to breaches of representations and warranties.

83. SPA § 9.1 provides, "[s]ubject to the limitations in Section 9.11", that the Selling Shareholders shall indemnify [Claimants/Purchasers] "with respect to any and all claims, losses, damages, liabilities, demands, assessments, judgments, costs and expenses ... (collectively 'Losses') suffered by Purchaser" resulting from: (a) breaches of representations, warranties, covenants or agreements; (b) the [Facility A] Environmental Conditions; or (c) environmental liabilities related to the [Facility B].

84. SPA § 9.11 establishes financial limitations for indemnification obligations, except in cases of "fraud or an intentional breach of a representation, warranty, covenant or agreement in this Agreement". Section 9.11(a) provides deductibles (essentially of US$10,000 for one claim and US$300,000 for aggregated claims) for unintentional breaches of representations and warranties. (The Tribunal adopts the term "unintentional breach" for ease of reference, while recognizing that [Claimant/Purchaser] describes this category of claim as covering breaches not known to be intentional.) Section 9.11(b) (headed "Cap") provides that each Selling Shareholder's liability for indemnification for unintentional breaches of representations and warranties pursuant to § 9.1(a) shall not exceed the product of US$3 million and its ownership percentage; and adds that the sum of the liability of each Selling Shareholder for indemnification under § 9.11(a) and for indemnification under § 9.1(b) and § 9.1(c), collectively, shall not exceed the product of US$10 million and its ownership percentage. As discussed below, these dollar limitations in §§ 9.11(a) and (b) apply, by their terms, only to breaches of "representations and warranties," and not to breaches of "additional covenants and agreements".

85. SPA § 9.4 requires the party seeking indemnification to give notice to the indemnifying party within 60 days "of the discovery of any Loss". In the case of an asserted Third Party Claim, § 9.5 requires the party seeking indemnification to "undertake in good faith to give prompt notice" allowing the indemnifying party to prepare an effective defense.

86. SPA § 9.10 provides that indemnification is the parties' exclusive remedy for any breach except in the case of fraud or intentional breach.

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VIII. [Claimants'] claims against [Respondents]

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C. [Claimant/Purchaser]'s claim against [Respondent/Seller] for intentional breach

1. Intentional breach

134. [Claimant/Purchaser] and [Respondent/Seller] devoted substantial attention both in their written submissions and hearing testimony to [Claimant]'s claim that [Respondent] breached representations and warranties in SPA Article III by intentionally failing to disclose that [Company X] had promised customers unusually high levels of free goods and trade allowances..., which were not reflected in the Financial Statements prepared on a cash basis under Brazilian GAAP rather than on an accrual basis or specifically flagged in the pre-Closing Disclosure Letter. The degree of attention is understandable given that "in the case of fraud or an intentional breach of a representation, warranty, covenant or agreement" (emphasis added), the limitations on the Selling Shareholders' indemnification obligations in SPA § 9.11, including the US$3 million indemnification cap, do not apply.

135. The first question facing the Tribunal, therefore, is the standard for finding an "intentional breach". The Parties essentially agree that, in light of the language used in SPA § 9.11, "intentional breach" is something less egregious than fraud, but it also must be something more egregious than negligence.

136. According to [Claimant/Purchaser], the standard for intentional nondisclosure is "failing to disclose liabilities of which [the actor] was aware".... Looking to New York law, albeit admittedly "from other contexts", [Claimant] argues that "all that is required" for an intentional breach is that it "be knowing, as opposed to inadvertent"....

137. In comparison, [Respondent] argues that, to prove intentional breach, [Claimant] must establish that [Respondent]: "(i) knew of accrued liabilities for free goods alleged by [Claimant]; (ii) knew that they were subject to disclosure under the representations and warranties of the SPA; and (iii) nevertheless did not disclose."... It is not enough, according to [Respondent], for [Claimant] to allege that [Company X]'s cash basis accounting did not disclose accrued liabilities; [Claimant] "must demonstrate that [Respondent] knew that accrued liabilities for free goods were material and thereby subject to disclosure under the representations and warranties of the SPA"....

138. On balance, the Tribunal finds that, in the context of SPA Article III and § 9.11, an "intentional breach" of a representation or warranty or an "intentional" non-disclosure, requires more than mere knowledge or awareness of the facts that are inconsistent with the relevant representation. "Intentional breach" does not go as far as fraud, but it also entails more than negligent or even reckless disregard of the responsibility to disclose the relevant facts. The plain meaning of the word "intentional" connotes a deliberate decision not to disclose information that one knows should be disclosed or at least that might be the proper subject of disclosure. Thus, the concept requires a showing that the failure to disclose the information resulted from a conscious choice. The Tribunal, of course, appreciates that applying this standard to the actual facts is a potentially nuanced and difficult process.

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4. Discussion and determination

162. The Tribunal turns first to [Claimant]'s allegations as to promised but undisclosed trade allowances, which [Claimant] valued at R$1.1 million... Although [Claimant] tended to include trade allowances in its discussions of free goods, the main underlying evidence goes only to levels of free goods.... Nor is there evidence that the levels of trade allowances increased significantly... from prior years, leading to any disclosure obligations for the Selling Shareholders. Indeed, the evidence reflects no actual payments to customers for trade allowances post-Closing....

163. The Tribunal accordingly denies [Claimant]'s claim for an award against [Respondent] for intentional breach of representations and warranties related to unusually high promised trade allowances.

164. Turning next to the issue of [Company X]'s undisclosed free goods commitments, the Tribunal first notes that both [Claimant] and [Respondent] presented substantial and plausible evidence in support of their opposing positions. The Tribunal has found it difficult to weigh that evidence and decide whether [Respondent]'s admitted nondisclosure of the admittedly high quantities of and delayed delivery times for free goods... was or was not intentional.

165. As this situation is not a straightforward one, the Tribunal has focused on what it sees to be the most compelling facts concerning the knowledge and intent of the relevant actors.

166. First, it is clear that [the chief financial officer and general manager of Company X] knew that the quantities of promised free goods had risen well above normal levels..., and that the time period for honoring those promises had more than doubled. However, he testified convincingly that, despite this knowledge, he did not consider the [Company X] Financial Statements to be misleading, at least as a matter of Brazilian GAAP and consistency in accounting.... He confirmed that he, like the outside accountants and auditors, told [Respondent] that the use of cash basis accounting "resulted in a fair representation of [Company X]'s financial condition".... Moreover, [he] did not know about the [Respondent] Earn-Out mechanics in the draft SPA, and so could not have focused on how the undisclosed high level of promised free goods might affect the Earn-Out. Therefore, there is no basis to find that his failure to pass along this information about promised but unbooked free goods reflected anything but a good faith contemporaneous belief that it was not necessary to flag this information to provide [Claimant] with an accurate portrayal of [Company X]'s financial condition.

167. Second, [a representative of Respondent on Company X's board of directors, Mr A] (not entirely convincingly) testified that he did not know, or at least did not pay attention to, the multi-million Brazilian real "bump" of promised free goods starting with [Company X]'s... price increases. More candidly, he testified that, if he had known of this liability, he would have disclosed the information to [Claimant] as the prospective purchaser.

168. Third, it is clear that [another representative of Respondent on Company X's board of directors, Ms B] did know about the unusually high levels of free goods. Regardless of whether she could or did determine this from [Company X]'s Financial Statements or the comparative spreadsheets, [Company X's CFO and general manager] "reminded" her unequivocally by email... that free goods as a percentage of sales had more than doubled... Yet, contrary to [Mr A's] assurances about what he would have done had he been in her situation, [Ms B] did not disclose any information about the increased free goods to [Claimant].

169. The key question, therefore, becomes whether [Ms B] deliberately decided not to disclose the increased free goods information to [Claimant], either by providing copies of [Company X's CFO and general manager]'s spreadsheets or flagging the liability - which was not determinable from the Financial Statements-in the Disclosure Letter.

170. Although this question, like the entire issue, is a close question, the Tribunal accepts [Ms B's] testimony that she did not deliberately hide the free goods information. Although she unconvincingly denied receiving and discussing the... spreadsheet... she did remember that [Company X's CFO and general manager] prepared and presented the spreadsheets to show "that he was in control of the free goods and trade allowances".... She also remembered being assured by [Company X's CFO and general manager] that there were no material differences between the accrued and cash basis levels of free goods... and hence that [Company X]'s cash basis Financial Statements were accurate for purposes of SPA representations and warranties.

171. The Tribunal has carefully studied the spreadsheets, which were a focal point of the hearing and post-hearing submissions. The Tribunal observes that they are not the most user-friendly of documents. They do show, at least when explained, that the cash basis figures... were actually somewhat higher than the accrual basis figures, i.e. that [Company X] was delivering more free goods that had been promised in past periods than it was promising for future periods. The spreadsheets also show, if explained, a projected lag time of several months before promises would be honored, but the impact of seasonal variations (for example, for holidays) is not evident. The Tribunal accepts that, on the basis of the spreadsheets alone-absent additional information about historical promises and delivery of free goods-[Ms B] would not necessarily have perceived liabilities for free goods commitments outside the normal course of business that had to be disclosed.

172. Given the importance of [Ms B's] state of mind for purposes of applying the standard for intentional breach of representations and warranties, the Tribunal considers the following exchange with her to be significant:

Arbitrator...:... when you received... the monthly spreadsheet, do you recall looking at it and thinking should I send it or should I not send it to [Claimant]?

[Ms B]: I don't recall even thinking that should I send it or should I don't send. We are sending to them the financial information that was in cash basis, that was-the one that was audited. I didn't think that should I send or should I don't send to him. I didn't think at that time that was a very important information to send to them. (...emphasis added)

That [Ms B] did not think about whether or not she should send the spreadsheets to [Claimant], knowing [Respondent]'s financial disclosure obligations under the SPA, is consistent with negligent (perhaps reckless) disregard of potentially disclosable information, but not with deliberate withholding of such information. The Tribunal accepts her testimony on this point-that she simply never considered whether [Respondent] should disclose this information-because there is no compelling evidence that she must have considered the issue and must have made a conscious choice not to inform [Claimant] of the information.

173. [Ms B's] testimony is plausible in light of the other evidence in the record. The Tribunal notes, for example, that the outside auditors told [Ms B] (and others at [Respondent]) nothing different than [Company X's CFO and general manager] did. As argued by [Respondent], under New York law, it is reasonable for directors to rely on the advice of senior management and outside auditors (N.Y. Bus. Corp. Law § 717(a)(2) (McKinney 2003)).

174. The Tribunal does not consider that [Claimant] must prove a specific motive for [Respondent]'s nondisclosure of the increased free goods information in order to prove that the nondisclosure was intentional. The Tribunal notes, however, that the record does not support [Claimant]'s allegations that [Mr A] and/or [Ms B] could or did calculate... that the elevated levels and delivery times for free goods, combined with [Company X]'s cash basis accounting method, would operate to maximize the ultimate Earn-Out payable to them. In the end, there was no... Earn-Out under SPA § 2.3 and [Claimant] agreed to use the accrual basis accounting method for calculating the... Earn-Out.

175. Accordingly, on balance, the Tribunal finds that [Claimant] has failed to establish that [Respondent] intentionally breached SPA § 3.9 by not disclosing the accurate situation as to free goods commitments and, hence, denies [Claimant]'s request for relief against [Respondent] for intentional breach.

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IX. [Respondent 1]'s counterclaims

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D. Brazilian real exchange rate for the US$ 7,000,000 advance [against future earn-out payments]

382. [Claimant] and [Respondent] devoted substantial time and effort, both in their written submissions and at the hearing, to the question of the proper US dollar/Brazilian real exchange rate to apply to [Claimant]'s US$7 million advance against [Respondent]'s... Earn-Out. This is the topic of [Respondent]'s main counterclaim, as well as the basis for a request for declaratory relief from [Claimant]. The focus on the Earn-Out exchange rate question is not difficult to understand, as the evidence at the hearing confirmed that over R$7 million is at stake.

383. [Respondent] sought summary resolution of the issue, which the Tribunal denied because the early submissions by both [Respondent] and [Claimant] reflected substantial disagreement as to the interpretation of various relevant sections of the SPA, if not also disputes as to material facts.... The Tribunal invited [Respondent] and [Claimant] to focus further in subsequent submissions on the following questions: (a) Is there evidence of contemporary discussions between [Claimant] and [Respondent] representatives regarding the exchange rate risk? (b) Is there more information on the process used in calculating the total Earn-Out and consideration of the advance in that process? (c) Do issues of exchange rate risk affect other claims for liability and, if so, how? (d) Is there evidence available, expert or otherwise, as to common or best commercial practices in relation to allocation of exchange rate risk in calculation of earn-outs in cross border transactions?... The Tribunal appreciates that [Respondent] and [Claimant] both did address these questions.

384. The core issue for determination is whether, in calculating the net amount of the... Earn-Out, the value of the US$7 million advance in reais to be deducted from the gross... Earn-Out is the number of reais that US$7 million actually bought as of Closing... or the number of reais that US$7 million would have bought on the day the Earn-Out was paid or should have been paid.

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2. Discussion and determination

396. In weighing [Claimant]'s and [Respondent]'s contrary interpretations of the SPA concerning the treatment of the advance against the Earn-Out, one thing is clear to the Tribunal: there was no meeting of the minds as to when the US$7 million advance would be converted from dollars to reais for final Earn-Out calculation purposes.

397. The evidence reflects that the idea of an advance was raised late in the negotiations, shortly before the Closing, when the rest of the language in the SPA related to the Earn-Out and currency conversion was already in place.... There is no evidence that [Claimant] and [Respondent] discussed this particular issue in the negotiations, and neither [Respondent] nor [Claimant] so contends.

398. For whatever reason, the negotiators failed to spot or raise this issue and so the currency exchange treatment for the advance against the Earn-Out is not explicit one way or the other. It appears to the Tribunal, from the weight of the evidence, that [Claimant] did not consider the matter until the time came to prepare the Earn-Out calculations and [Respondent] sought to use a contemporaneous conversion rate. In comparison, it appears that [Respondent] assumed a later conversion rate and hedged accordingly-but did not alert [Claimant] to its hedge plans, which perhaps would have allowed clarification of the situation earlier.

399. This situation-[Respondent] and [Claimant] proceeding "like ships passing in the night"-is understandable, if not inevitable, in a complex transaction between a US dollardenominated company and a Brazilian real-denominated company. The economic experts... illuminated the situation from the perspective of international commercial transactions. The Tribunal, which invited in its First Order... evidence, "expert or otherwise", as to commercial practice in the allocation of exchange rate risk in earn-outs in cross-border transactions, is appreciative of the expert testimony.

400. In the end, however, as with the issue of the intersection of the SPA § 9.11(b) caps with the Selling Shareholders' [spin-off] guarantee in § 6.14, the Tribunal must look at the contractual language used by the Parties in the context of the transaction.

401. To some extent, the language in the SPA is contradictory, by mixing currencies. Section 2.3(b) describes the US$7 million advance as an "advance against future Earn-Out payments" pursuant to § 1.3. Section 1.3(a), in turn, provides for payment of the Earn-Out "in Brazilian currency" but "less US$7,000,000".

402. What the Tribunal finds determinative, however, is that the US$7 million was unequivocally an "advance" against an amount due and payable-if at all-later. The crediting of an advance occurs when the later main payment is due and payable. It is at that time when the calculations and currency conversions are most appropriately done.

403. Admittedly, the situation would be clearer if the US$7 million advance were refundable not just if the EBITDA change was negative, but also to the extent the Earn-Out turned out to be a positive number less than US$7 million, but [Claimant], purposefully or not, failed to protect itself contractually against that eventuality.

404. Under the circumstances, the interpretive decision is a difficult one. On balance, the Tribunal must reject both [Claimant]'s and [Respondent]'s proposed conversion dates. Given that the US$7 million payment was an advance on a later payment, conversion of the amount at the US$/R$ exchange rate as of the Closing..., as [Claimant] argues, is not appropriate. Nor, however, is [Respondent]'s proposed conversion at the US$/R$ exchange rate as [the date] when [Claimant] first paid a portion of the... Earn-Out, appropriate.

405. Instead, the Tribunal finds that the controlling date is... the date on which [Claimant] undertook to perform its dual contractual obligations to calculate and concurrently pay the... Earn-Out due to [Respondent]. The Tribunal has found that [Claimant] breached both obligations-because its calculations were inaccurate, as [the auditors] later determined, and because it made no payment at all. Giving [Claimant] the benefit of three days after the notice to make the concurrent payment (the time period allowed in SPA § 1.4 for [Claimant] to make a payment following a... final determination [by the auditors]), the Tribunal finds that [three days after the date on which Claimant undertook to perform its obligation to calculate and pay the Earn-Out] marks the point at which the Earn-Out should have been paid and the US$7 million advance should have been set off, in the converted amount of Brazilian reais.

406. The Tribunal considers that this is the scenario that puts [Respondent] and [Claimant] in the position in which they would have found themselves but for [Claimant]'s wrongful refusal to pay the Earn-Out concurrently with the notice (see, e.g., Goodstein Construction Corp v. City of New York, 80 N.Y.2d 366, 373 (1992)). Pursuant to SPA § 11.8, the exchange rate on the day before that payment date... is the rate at which the US$7 million is properly converted to reais.'